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Mindtree: Jump starts the year

Jul 21, 2011

Mindtree has announced the first quarter results of financial year 2011-2012 (1QFY12). The company has reported a 5.6% quarter-on-quarter (QoQ) and 7.8% QoQ growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary

Net sales grew by 5.6% QoQ during 1QFY12. The revenue growth was driven by volumes.

Operating margins declined marginally by 0.1% QoQ due to higher employee costs (as a percentage of sales). The operating margin almost remained at the same level of the previous quarter despite wage hikes given during the quarter.

Net profit grew by 7.8% QoQ during the quarter. This was mainly driven by higher other income and lower depreciation charges during the quarter.

Added 25 new clients during the quarter, thus taking the total number of active clients to 283.

Trailing 12 months attrition increased to 25.6% during the quarter from 25.1% reported in the previous quarter (4QFY11).

Financial performance: A snapshot...

(Rs m)

4QFY11

1QFY12

Change

Sales

3,912

4,131

5.6%

Expenditure

3,472

3,671

5.7%

Operating profit (EBDIT)

440

460

4.5%

Operating profit margin (%)

11.2%

11.1%

Other income (Including forex gain/loss)

101

122

20.8%

Depreciation

184

180

-2.2%

Interest

2

-

Profit before tax

355

402

13.2%

Tax

35

57

62.9%

Profit after tax/(loss)

320

345

7.8%

Net profit margin (%)

8.2%

8.4%

No. of shares (m)

40.1

Diluted earnings per share (Rs)*

30.0

P/E ratio (x)*

13.4

* On a trailing 12 months basis

What has driven performance in 1QFY12?

Mindtree recorded a 5.6% QoQ growth in net sales during the quarter. The growth was largely driven by volumes which grew by 6.2% QoQ during the quarter.

In terms of business segments, IT Services registered a growth of 8.8% QoQ. The other segment Product Engineering Services (PES) business has started seeing positive traction again and reported a marginal growth of 0.3% QoQ during the quarter. Excluding business from Kyocera, a key client based out of Kyoto, Japan the growth in PES business was higher.

Except for the 'Manufacturing' vertical, all other verticals witnessed a growth during the quarter. Revenues from 'Others' and 'Banking, Financial Services and Insurance (BFSI)' witnessed growth of 20.0% QoQ and 11.8% QoQ respectively. Revenues from 'Travel & Transportation' witnessed a sequential growth of 2.9% QoQ as well. However, revenues from 'Manufacturing' vertical witnessed a marginal decline of 0.3% QoQ during the quarter

In terms of geographies, Mindtree saw a growth of 9.9% QoQ in its business from Europe (23% of net sales). Revenues from the US (60% of net sales) and India witnessed growth of 6.1% QoQ and 0.9% QoQ respectively. However, revenues from the rest of the world declined by 3.7% QoQ during the quarter.

Segmental Performance

Revenue Break-up (In Rs m)

4QFY11

1QFY12

Change

On basis of segment

IT Services-Revenues

2,422

2,636

8.8%

Product Engineering Services

1,490

1,495

0.3%

On basis of industry vertical

ITS-Manufacturing

626

624

-0.3%

ITS-BFSI

794

888

11.8%

ITS-Travel and transportation

458

471

2.9%

ITS-Other

544

653

20.0%

Product Engineering Services (PES)

1,490

1,495

0.3%

On basis of geography

US

2,347

2,491

6.1%

Europe

857

942

9.9%

India

352

355

0.9%

Rest of the world

356

343

-3.7%

IT Services Revenue Breakup

ADM

1,618

1,721

6.4%

Consulting and IP licensing

97

105

8.8%

Package implementation

77

76

-1.4%

Independent Testing

431

482

11.9%

Infrastructure management and support

199

250

26.1%

Mindtree added 25 new clients during the quarter.

On a net basis, total employee strength increased by 30, thereby taking the total strength to 9,577. Attrition rate also increased to 25.6% at the end of March 2011 as compared to 25.1% reported in the previous quarter (4QFY11).

Mindtree’s operating margin almost remained at the same level of 11.1% despite wage hikes given during the quarter. This was mainly due to revenue growth and operation efficiency which offset the increase in employee costs. It also nullified the negative impact of cross currency movement.

Net profit margin grew by marginally 0.2% QoQ during the quarter despite the higher tax rate during the quarter. This was mainly driven by higher other income and lower depreciation charges during the quarter.

What to expect?

At the current price of Rs 402, the stock is trading at a multiple of 7.3 times our estimated FY14 earnings.

The company witnessed a good performance during the quarter. Going forward, the management expects the growth momentum to continue. On pricing front, they stated that they have not seen any softness in the pricing. On the other hand, they expect billing rates to remain stable with an upward bias.

On the margin front, the management expects that there would be pressure in the next quarter as around 900 new employees are expected to join the company. But they expect it to improve in the second half of the financial year on the back of revenue growth, better employee utilization, employee mix and operational efficiency. The management expects tax rate to be in the range of 16-18%.

We had recommended the stock in November 2008, and it has already crossed our target price since then.

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